Chancellor Rachel Reeves is set to announce reforms to create pension ‘megafunds’ in an attempt to boost investment and economic growth in her inaugural Mansion House speech this evening.
These reforms will aim to pool the assets from 86 local government pension schemes in England and Wales, reportedly managing £500 billion in assets by 2030. It is possible that these changes could ‘unlock £80 billion’ of investment for infrastructure projects as it hopes to mirror similar ‘megafunds’ set up in Canada and Australia. The government will also consult on measures to set a minimum size requirement for defined contribution (DC) pension schemes to drive consolidation into ‘megafunds’ and maximise their ‘investment potential’. But the interests of savers may be left behind as ambitious measures could put savers’ money at risk and undermine their retirement goals as Tom Selby, director of public policy at AJ Bell, comments in the following analysis:
“The government’s hope will be that by moving from having 86 local government schemes down to a single one, or a few, will benefit from economies of scale.
“My overarching concern is that the needs of the saver, whose money is ultimately going to be risked, will be forgotten about. There’s a reason that an occupational scheme has a trustee to look after the interests of members. Part of that is investing their money to maximise returns and get the best retirement outcomes possible.
“Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money. If it goes well, everyone can celebrate. But it’s clearly possible that it will go the other way, so there needs to be some caution in this push to use other people’s money to drive economic growth.
“It needs to be made very clear to members what is happening with their money. One of the strengths of the system we have today is that investment decisions for members of defined contribution (DC) default funds and defined benefit (DB) schemes have independence baked in, usually via the appointment of trustees. Those trustees are required to make those decisions first-and-foremost with the aim of delivering the highest possible income in retirement for members.
“Good member outcomes are therefore at the heart of the UK pension system. Given we are likely talking here about pensions where the member is either disengaged in the case of DC defaults or has no say over investment decisions in the case of DB, it is crucial that remains the case.
“If there are impediments to trustees or those representing members maximising retirement incomes, either in law or understanding, they should be addressed.”
